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Switzerland

The Swiss Federal Statute on Mergers, Spin-offs, Conversions and Transfers of Assets (the Merger Law) entered into effect on July 1 2004. It offers companies more flexibility but also creates more risk. Although the Merger Law focuses only on the four above-mentioned types of transactions, it applies not only to corporations and other legal entities but also to partnerships, sole proprietorships, pension funds and, to a certain extent, public institutions.

In general, the Merger Law provides more flexibility for restructuring small and medium-sized companies. Some modifications in the relevant tax laws support the flexibility of the new law - transfers of participations or businesses within a Swiss group structure can be carried out without negative tax consequences.

Mergers and spin-offs

With a few exceptions, mergers will be feasible among all types of companies, regardless of whether the merging or merged company has its seat in Switzerland or abroad. A Swiss corporation may merge simultaneously with a foreign company (if the merger will be recognized by the foreign jurisdiction) and with another Swiss company.

The new law expressly allows mergers with undercapitalized or over-indebted companies as long as the merging company's equity exceeds the amount of the undercapitalization or over-indebtedness of the merged company. This possibility brings more flexibility for restructurings within a group. The stricter transparency rules for separate administration safeguard the rights of creditors.

A merger may be structured in such a way that the shareholders of the merged company do not necessarily have to receive shares of the merging company but instead can receive shares of, for example, the parent company. Such a merger (which is known in the US as a triangular merger) could be useful if the shares of a parent company, but not of the merging company, were listed on a stock exchange. Under the new Swiss law, a triangular merger needs the approval of 90% of the shareholders of the merged company. Also, the shareholders of the merged company may resolve that they receive cash instead of shares of the merging company.

The spin-off of a company is one of the most important elements of the Merger Law. In a spin-off, a company transfers all or part of its assets to one or more other companies either already in existence or newly formed. In exchange for this transfer, the shareholders have to receive the corresponding number of shares of the acquiring company. The transfer of the assets as well as the assumption of the liabilities will be carried out in one step, based on the demerger agreement. The law allows many different ways to structure spin-offs. For example, a company may transfer all of its assets and liabilities to a newly created company and may be dissolved as part of such a transaction; alternatively it may transfer only a part of the assets and liabilities and continue its operations. Furthermore, a corporation may be split into a company with limited liability and another company organized in the form of a corporation. However, the spin-off of a corporation or a limited liability company with the transfer of assets to a partnership or foundation is not allowed under the new law.

Compared with a merger, spin-offs involve greater risks for creditors and minority shareholders. Majority shareholders may try to implement a spin-off by keeping the sound part of the business but transferring the weaker part into a new company at the risk of creditors or minority shareholders. Consequently, in cases where the interests of minority shareholders or creditors are at risk, the law requires that the resolutions of the shareholders be taken with qualified majorities.

Transfer of assets

The provisions on spin-offs are complemented by a new form of transferring assets and liabilities. A transfer of assets and liabilities can be made by a company or partnership registered in the commercial register to transfer all (or only part) of its assets and liabilities based upon an inventory to another legal entity. For a transfer it will not be necessary to comply with the formal provisions that would apply if assets and liabilities were transferred on a case-by-case basis. A transfer of real estate, however, will still need to be made in the form of a public deed. The Merger Law does not, unfortunately, sufficiently clarify whether in the case of a transfer of assets and liabilities all agreements are transferred to the company without the consent of the contractual counterparties.

Transactions relating to mergers, spin-offs or conversions of companies as well as transfer of assets and liabilities fall within the scope of the new Merger Law if they are filed with the commercial register as from July 1 2004. Such transactions will benefit from the advantages of the new law, but it is necessary to comply with the detailed requirements on the new forms of the law. Although some issues need still to be clarified, the regulations relating to the registration of these transactions in the commercial register provide a reliable basis for implementing the new law.

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